Within the space of a single year, the public focus on the housing market has shifted from a concern that persistent and high inflation of home prices will preclude homeownership for moderate-income families to a worry that a downturn in home prices will undermine the health of the economy. How­ever, as a survey of the nation's housing markets reveals, concern on both counts has been over­blown, and the housing affordability problems that have emerged are concentrated in a limited number of metropolitan areas where years of counterpro­ductive land-use regulations have limited the sup­ply of building lots.

Specifically, areas with very high home prices tend to be those following smart growth practices by imposing restrictive zoning provisions (e.g., downzoning, limits on residential rezoning, green belts, and growth boundaries) and other impedi­ments to development (e.g., impact fees, proffers, and mandatory amenities and design features). The high-cost areas also tend to be the markets now experiencing the sharpest price declines. These reg­ulatory-induced housing affordability problems are not unique to the United States. Abusive land-use and building regulations in Australia, the United Kingdom, and Ireland have led to escalating home prices similar to some of the worst cases in the United States.

Affordable Housing. In most American commu­nities, houses are still affordable. For the country as a whole, the median price of existing homes sold in the second quarter of 2006 was just $227,500. While only tiny fractions of the residents in Los Angeles and San Francisco can afford to buy the median-priced home in their markets, the median-priced home in Indianapolis is accessible to 87.4 percent of the households in that community.

Similar measures of access and affordability indicate that many other major markets are afford­able, including Atlanta, Dallas, Houston, and St. Louis. According to a quarterly survey conducted by the National Association of Home Builders (NAHB) and Wells Fargo Bank, 50 percent or more of the households in 98 of the 199 regional hous­ing markets can afford the median-priced house or better.

Nonetheless, the media have focused on the extreme cases of unaffordability over the past sev­eral years. For example, in mid-2006, the median home price reached $576,300 in the Los Angeles area; $549,200 in parts of the New York City area; $443,400 in Washington, D.C.; $748,200 in San Jose; and $640,000 in Honolulu. These are just some of the metropolitan areas where home prices are now unaffordable for most residents.

According to NAHB's Housing Opportunity Index, less than 2 percent of Los Angeles house­holds and 7 percent of households in the New York area have access to the median-priced house. Of the 199 markets surveyed, 22 are within the affordable range for only 10 percent of the population. Of these 22 least affordable markets, 20 are in Califor­nia, where restrictive land-use practices have been in place since the 1970s.

Although the housing affordability problem is confined to a limited number of geographic areas, these markets account for a significant portion of the nation's population and commercial activity. To date, much of the concern has focused on how high prices adversely affect the homeownership oppor­tunities for moderate-income families.

Home prices have been exceptionally high in Cal­ifornia for many years, and the homeownership rate is nearly 50 percent in many metropolitan areas and below 60 percent in the state, compared to almost 70 percent nationwide. Yet as more and more com­munities adopt California-type land-use regula­tions, homeownership opportunities will decline to California levels, creating an involuntary “rent belt” throughout the United States as millions of moder­ate-income families are excluded from homeowner­ship and pushed into apartments. In Virginia, where many of the fast-growing counties began to enact stiff land-use regulations in the late 1990s, the homeownership rate has fallen from 75.1 percent of households in 2001 to 71.2 percent in 2005—the largest decline of any state.

Domestic Migration. Of potentially greater sig­nificance is the way accelerating home prices are influencing migration patterns within the United States as households and businesses move from high-cost areas to lower-cost areas to enhance their standards of living or competitiveness. Since 2000, the biggest losers through domestic migration— which measures the number of residents who have left the state to live elsewhere—have been New York and California, the nation's least affordable places. Much of their losses have come from their major metropolitan areas. Between 2000 and 2005, Cali­fornia lost 645,000 residents and New York lost 961,000 residents to other states. The losses have been even worse for major metropolitan areas. New York City, San Francisco, and Los Angeles, respec­tively, lost 1,175,000, 549,000, and 305,000 resi­dents to other states or other areas within their states.

While these states are losing domestic popula­tion, they have gained in total population because immigration from abroad has more than replaced the domestic population losses. The consequence of this population shuffle is that the losing states and metropolitan areas are giving up their wealthier, better educated, and more productive citizens for those with less wealth, income, and education. Ulti­mately, this will lead to relatively lower incomes in the losing areas in comparison to past levels. Cali­fornia, for example, once had much higher incomes than the national average, but that premium has nearly disappeared over the past several decades.

Conclusion. The overly regulated metropolitan areas seem likely to experience considerably less population and economic growth in the future than they would if their land-use policies had not broken the historic relationship between house values and household incomes. To restore higher levels of eco­nomic growth, such areas will need to liberalize their land-use policies. In the meantime, affordable metropolitan areas that have not grown as strongly in recent decades face a unique opportunity for renewal and expansion. Such areas, many in the long dormant Midwest, will need to avoid the siren song of excessive land regulation to take advantage of this potential.

Wendell Cox, Principal of the Wendell Cox Con­sultancy in St. Louis, Missouri, is a Visiting Fellow at The Heritage Foundation. Ronald D. Utt, Ph.D., is Her­bert and Joyce Morgan Senior Research Fellow in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.